How far was Speculation responsible for the Wall Street Crash?

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Introduction

How far was Speculation responsible for the Wall Street Crash? Word Count : 916 By, Preethi Kumar, Grade 10. The main aim of this essay is to examine the various factors that caused the Wall Street Crash (The worst period of depression1) and to investigate how important each of them were. The main factors, which caused the depression, were Speculation, Overproduction, Lack of Export Market and the Distribution of Income. Speculation was one of the short-term causes, which gave way for the Wall Street crash. Speculation can be defined as a gambling of the shares in the stock market. It was mainly dependent on the credit system. Suppose 'A' speculates (or predicts) that the share prices would increase constantly through out the day. He buys 100$ share in the aim of making a profit by selling it to 'B' at a higher price. He succeeds in doing so. He sells it for 200$. However, 'B' does not pay 'A' the money. Instead he issues a credit note that he would pay 'A' back when he gains a profit. ...read more.

Middle

Hence, they decided to sell the shares too. The final result was that shares collapsed and became worthless because no-one is prepared to buy them. This was an important cause to the Wall Street Crash. Nevertheless, there were other important causes like Over production of goods, decrease in trade and uneven distribution of money between the rich and poor of the country. According to me, it was the uneven distribution of money that proved to be the main cause of the Wall Street Crash. The roaring 20s was not fruitful to majority of the American population. The rural farmers, mine workers, black population and the immigrant population were not even touched by the consequences of the boom. Unfortunately, the above mentioned groups of people formed America's major part of the population. About 60% of the American families had a per capita income less than 2000$(440�)2, the minimum sum of money required for basic elements of living. As only a very restricted percentage of population were rich, it was only this restricted amount that would buy the mass produced goods. ...read more.

Conclusion

The wealth of America was not divided evenly. The rich % of population had finished with all their purchases and money spending. The major population of America could not afford the mass produced goods. Hence, there was a surplus. Many companies could not sell their commodities. Consequently, the price of the goods decreased. As a result, the company profits lowered. This in turn meant that the share dividends decreased. Hence, the Investors of the shares were not interested in buying the shares. As a result, there was a fluctuation in the share prices. Thus, the selling of shares increased drastically. Contradictorily, buying of shares decreased. The doubt in the mind of investors which fuelled them to sell their shares was caused by over production of goods. This was in turn caused by the uneven distribution of wealth amongst the population. In other words, it can be said that, if the American wealth was distributed properly and evenly, there would have been no over production, the prices would have remained booming and increasing hence, the Wall Street crash would not have occurred. 1 http://www.bbc.co.uk/history/timelines/england/ear20_wall_street_crash.shtml 2 A Handout given by the teacher - chapter 11, page 26. ...read more.

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Most of that 16 million increase was inexperienced buyers. The Inexperienced buyers were buying shares purely for a quick profit they did not have confidence in their shares. Stockbrokers will hang on to their shares until they climb in value again.

When a company isn't doing as well the company's value falls and therefore their stock values fall as well. Overproduction led to another factor which also led to the bust was that the wealth of the 1920s was not evenly distribute, meaning their were a lot of poor Americans.

That evening, five of the country's bankers issued a statement saying that due to the heavy selling of shares, many were now under-priced. This statement failed to stop people wanting to sell their shares and on the 29th October, over 16 million shares were sold.

Furthermore, investors are also indifferent of the form of payment if one is made. While the MM model has often been criticized for its lack of realism due to its extreme assumptions it can be seen as a starting point for introducing and examining one by one elements of realism.

To get a return on their money invested they can either sell their shares or get a dividend on the profits made by the company. If the company does well, then the value of the shares will rise and Shareholder will get a better price for them if they choose to sell.

Shareholders are those who are least affected by the CSR of a company or corporation, as they are motivated by profits. In a cold, capitalist manner they seek profit over ethics and CSR. For example would those who were ethically motivated when purchasing and dealing in shares but stocks in Nike (1)?

The surplus goods could not be sold overseas because, after years of American tariffs Europe had put up its own tariffs, to protect its industries. So people in Europe could not afford to but American goods. This meant that the problem of overproduction could not be solved.